Chapter 10 - Cash and Financial Investments

(7) A budget for investment revenue.

10-20 The monthly report relating to securities transactions should show:

(1) Securities owned at the beginning of the month.

(2) Purchases, sales, gains, and losses during the month.

(3) Dividends and interest received.

(4) Securities owned at the end of the month.

10-21 Information to be noted by the auditors during their inspection of securities includes (a) name of
issuing company, (b) face amount, (c) serial number, (d) maturity date, (e) date and rate of interest or
dividends, (f) presence of all future interest coupons, and (g) name in which registered.

10-22 In accordance with SAS No. 73, the auditors should consider the professional qualifications and
independence of the specialist—the securities appraiser. In addition, the auditors should assess the
appropriateness and reasonableness of the valuation model and evaluate the reasonableness of the
assumptions used in the model. The auditors should assure that the model considers all aspects of
risk, such as counterparty credit risk, risk of adverse changes in market factors, and risk of losses
from legal or regulatory action. In addition, any significant information provided to the specialist by
the client to be used in appraising the options should be tested.

10-23 The audit of financial investments can be very complex and present special risks requiring
specialized skill or knowledge in performing audit tasks such as:

 Identifying controls at service organizations that provide financial services and are part of the
client’s information system.
 Obtaining an understanding of information systems for securities and derivatives that are
highly dependent on computer technology.
 Applying complex accounting principles to various types of financial investments.
 Understanding the methods of determining the fair values of financial investments, especially
those that must be valued using complex valuation models.
 Assessing inherent and control risk for assertions about derivatives used in hedging
activities.

Therefore, the auditors may decide that the assistance of specialists either within or outside the firm
is needed to assist in the audit of complex financial investments.

10-24 The auditors can make an independent computation of dividends earned during the year by reference
to dividend record books published by investment advisory services.

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